The less expensive iPhone

Rumors of a less expensive iPhone, in one form or another, certainly aren't new. Rumors follow want. We want iPhones. The less expensive iPhones are the more of them we can have, and the more often we can have them. We know that. Analysts know that. And Apple knows it too.

In 2007, the original iPhone was mass-market prohibitively, Ballmer-laugh-inducing-ly expensive. So, Apple and Steve Jobs adjusted the price down. In 2008, Apple changed course, worked out a subsidized model for the iPhone 3G, and the cost of entry became only $199.

In 2009, when Apple introduced the the iPhone 3GS, they kept a lower-capacity version of the iPhone 3G around, and the cost of entry became $99. In 2010, when Apple introduced the iPhone 4, the iPhone 3GS went to $99. And in 2011, when Apple introduced the iPhone 4S, the iPhone 4 became the $99 iPhone, and the iPhone 3GS dropped the on-contract cost of entry to $0. With the 2012 introduction of the iPhone 5, the iPhone 4 has become the $0 iPhone.

It's not difficult to imagine a second line of thinking at Apple, however, where they also tossed around the idea of a secondary line of iPhones. One where older models weren't dropped in price, but new models were designed to be less expensive from the start. But if that was ever the case, if Apple ever had such a device in the planning stages, be it since 2010 or even earlier, they haven't chosen to go that way, or to introduce more than one new iPhone model a year. At least not yet...

Never say never

Something I've learned over the years, sometimes embarrassingly, is to never say never when it comes to Apple.

Apple would never switch to Intel. Apple would never put video on an iPod. Apple would never use the name iPhone 5. Apple would never release an iPad mini. Apple would never change the iPhone's aspect ratio. Apple would never release two iPads in a year. But Steve Jobs said... But Tim Cook said... But Phil Schiller said...

Never is a hyperbolically long time, and no one outside a fictional universe can see to the end of it.

Whether or not Apple is likely to do something, however, for what reasons, and under what market conditions, are much tougher but ultimately more important questions to consider.

Less expensive vs. cheap

The easiest way to lower costs is to make something cheap. Cheap components, cheaply assembled, cheaply packaged, with cheap software and services, and cheap support, sold at razor-thin margins, results in a really cheap price tag. Nothing exemplifies this better than the netbooks of the last decade. Sold at unprecedentedly low price points, they ultimate pleased almost no one, not the customers who bought and suffered through trying to use them, nor the manufacturers who saw their profitability vanish and their market get trashed. They pleased no one but the people for whom price is the only important feature, the kind of customers with no brand loyalty, who break companies and entire industries, if those companies and industries are foolish enough to cater to them.

The harder way to lower costs is to make something transformative. Instead of a netbook, Apple released the MacBook Air, ultimately providing greater value at a consistent price point, rather than less value at a lower price point. Apple also released the iPad, which ditched the keyboard and trackpad but added multitouch to the mix, kept production values high, and still started at half the price of the lowest end MacBook.

With the iPod shuffle and the Mac mini, Apple removed the screen but kept their amazingly high manufacturing standards in place. Both are great products, just not expensive ones relative to the rest of the line. The second Apple TV was much less expensive than the first because it was smaller, used iOS rather than Mac components, and was built to stream rather than store huge amounts of content. The current line of MacBook Airs brought MacBook Pro quality components to a lower price point at the cost of performance and ports. Even with the iPod mini/nano and the iPad mini, Apple introduced slightly lower priced versions of popular products by reducing size rather than build quality.

Apple may not know how to (i.e. be willing to) make cheap products, but over the last decade they've proven they can continuously introduce less expensive ones when and as they choose.

Less expensive vs. subsidized

While Apple has released lower-cost versions of the iPod, iPad, Apple TV, and Mac, they've never released a lower-cost version of the iPhone. Apple has dropped the price of the original iPhone, and they've arranged for carriers to subsidize the vast majority of the cost of every iPhone that's followed. The original iPhone was introduced at $499 for the 4GB model and $599 for the 8GB model. Today, a new, off-contract iPhone 5 costs $649 for 16GB, $749 for 32GB, and $849 for 64GB.

Even the $100 iPhone 4S is still $549 for 16GB, and the $0 iPhone 4 is still $450 for 8GB.

Apple's current strategy of keeping previous generation iPhones around at lower, subsidized price points absolutely creates the perception of a cheap iPhone on-contract and in established markets. But it does little or nothing to address a lower cost, off-contract iPhone, especially in emerging markets, the ones dominated by cheap Android phones, outdated BlackBerries, and the remnants of Symbian — the ones responsible for some part, even a large part, of those platforms' market shares.

Apple kept the iPhone 3GS on the market from when it was introduced in June of 2009 to when it was put to rest in September 2012. That worked out to one year starting at $299 on contract, $650 off-contract, a second year at $99 and $550 respectively, and a third and final year at $0 and $450. Just before it went end-of-life, and just before the iPhone 5 was announced, there were rumors that the iPhone 3GS might be kept around for yet another year — it was binary compatible with iOS 6, after all, even if nowhere near feature-complete. Since there was no way Apple could further drop the price without paying people to take it — -$100 if you sign up now! — speculation was Apple could instead drop the off-contract price further, perhaps to $350, and make a run at Android and BlackBerry in those emerging markets.

Apple, however, has two core beliefs that make that strategy unlikely:

Apple believes in offering delightful products

Apple believes in turning a healthy profit while they do so.

To sell an iPhone 3GS into 2013, as hardware limited as it is, and at a price point where even mind-boggling economies of scale wouldn't allow for Apple level margins, was likely a non-starter.

So the iPhone 3GS was put out to pasture, and the idea of a less expensive iPhone for emerging markets was, at least temporarily, put out the pasture with it.

Never say never, again

So, if we assume a less expensive iPhone wouldn't be old and outdated, or sold at low-or-no margins, then that only leaves a new product sold at acceptable margins. If Apple doesn't follow the BlackBerry or Android strategy, which isn't in their DNA, then they're left to follow the Apple strategy.

Dropping the screen from a less expensive iPhone, the way Apple dropped it from the iPod shuffle and Mac mini could work for a phone-only device, but that would remove the immense platform value — and lock-in — of the App Store, and that seems unlikely.

Reducing something else, the way Apple reduced the size of the iPod mini/nano, or the screen resolution of the iPad mini, seems more likely. An iPhone 3GS but not, perhaps with a non-Retina but still 4-inch display, perhaps offered in colored plastic or even iPod touch-style colored aluminum, without the latest processor, perhaps without LTE, at least initially, or lots of RAM or storage capacity, absent every bell and whistle but keeping every iota of build quality, rounding out the last of the Lightning Connector line, could be a candidate.

Bottom line

It's not a matter of saying Apple would never do something. Times change. Markets change. Companies change. Plans change. And change again.

If Apple decides they don't particularly care about emerging markets right now, then if history is any indicator, we can still look forward to a $0 iPhone 4S on-contract, $450 off-contract, whenever the next update cycle rolls around. If, however, Apple does decide to put their foot on the gas and head straight towards a less expensive off-contract iPhone, then history also shows they're plenty smart enough to do it.

Reader comments

The less expensive iPhone

FIRST: What most people don't understand is that they will always be paying at least full price for the iPhone. Anyone getting a $0 iPhone on a contract will eventually pay full-price for that iPhone through the life of the contract. Essentially, the phone company is only giving a loan to the consumer for the iPhone that must be paid back. There is no subsidy.

SECOND: There is no cheap iPhone. Apple doesn't do cheap. Apple only uses the best materials. If the best materials such as Gold become inexpensive, then Apple may lower the price of the product. But Apple never does cheap.

I definitely think they will come out with a less expensive iPhone for emerging markets or just give them the older models.

Eventually it will make sense in the US market too once they saturate smartphones with the majority of folks that are going to buy a smart device.

Who will cater to the people who don't want a smartphone by offering something comparable price to get them in the door. These people will eventually upgrade to the standard more expensive model once they have experienced all that is iPhone & Android.

Great article! I agree with your logic. I think we were all surprised when Apple ran Intel. So they might make a cheaper alternative to the more expensive iPhone 5. Your idea about a better version of the 3GS is also my best guess.

It breaks the model to combine them. I think it is an error to say that the iPad mini is a cheaper version of the iPad or that the MacBook Air is a cheaper version of the MacBook. They serve different utilities, they are not just dumbed down versions.

Does Mercedes-Benz need to make a low-cost vehicle to compete with Honda?

What I meant to say is that Apple can't "de-feature the iPhone" and expect to sell any to new customers who aren't Apple faithful. It's really about the Chinese Market that they want to sell iPhones in. China doesn't appear to be interested in over paying for older iPhones and 2 million iPhone 5 sold in China isn't enough.

Can we stop this crap already? Apple has more than 100 billion in the bank. It has more in profit per year than several of it's competitors put together have in revenue. It has over 400 million, possibly 500 million active iTunes accounts, and it's App Store just passed 12 billion downloads. Framing the Apple of the last 10 years in the religious metaphors generated in the early 90s is trite and boring.

I don't really care in what tone "Apple faithful" is used, it's annoying as Hell. It hasn't been relevant since the iPod turned 5, and certainly not since the iPhone was introduced.

Apple can't "de-feature" the iPhone. What they could do is make an iPhone 4 with a lightening port, price it same as the iPhone is now, and call it "the less expensive iPhone". Other than that, who's really concerned with the "off contract price" of an iPhone? It's not like anyone is really looking to leave AT&T to go to T-Mobile, and an unlocked iPhone from Sprint can't go to Verizon, AT&T, or T-Mobile. So this isn't really about the price of an "off contract iPhone". It's about a "lower priced iPhone for China". A market that Apple REALLY wants a piece of but that isn't gaining traction in, due to the price of the iPhone there.

1. Apple never goes for the low-end of any market or product segment. Always the high end. Even the iPod shuffle is a high-end competitor in the no-screen music player market segment.
2. Apple likes to use screen technologies in multiple devices (e.g. iPhone 3GS screen technology in the iPad mini.) Better for economy of scale and for rapid deployment across multiple products.

I'll add my personal opinions to those facts and trends:

1. Apple's cheaper products (of the same generation) are smaller than the more expensive products in the same product family.
2. Sooner or later, iPad mini will get a Retina screen. Apple will want to amortize the expense of developing that screen technology (likely IGZO LED or OLED) over as many products as possible. To achieve economy of scale over time.
3. Apple really thinks things through. More on that in a second.

So, the facts I have chosen, plus trends (and my opinions) might indicate a lower-cost iPhone that is smaller and uses a next-gen high-density screen technology. Maybe a smaller chunk of the same Retina-screen goodness that will find its way into the Retina iPad mini.

That would allow the lower-cost iPhone to have a smaller screen that still has Retina resolution. Which in turn would allow all current iPhone 5-optimized apps to run on the lower-cost iPhone totally unchanged. Exactly the same pixel geometry: 1136x640.

The great unknown: would a small screen like that still be "usable"?
Only Apple knows. We'll all just have to wait and see.

P.S. When I said that Apple really thinks things through, I mean that it's possible that they designed the iPad mini with the lower-cost (smaller) iPhone in mind. The design process might have gone like this: "How big will the iPad mini screen end up being if we're going to use the same screen technology in it that we're going to use in the lower-cost Retina iPhone? The lower-cost iPhone needs to have a screen that's X by Y millimeters in size to be usable at 1136 x 640 pixels. So that would make the iPad mini screen just under 8" diagonal with that same screen technology. But we'll do the first-gen iPad mini with a non-Retina screen because the next-gen screen technology isn't quite ready yet." Haven't done the math myself, but that's the kind of forward thinking Apple seems to be doing.

Oh, and don't forget. Even if it's awkwardly small to tap on, the lower-cost (smaller) iPhone could still have Siri to handle many tasks that would otherwise require tapping small targets.

Apple's definition of "inexpensive" is not in alignment with the rest of the world. At least outside the rest of the first world. They painted themselves into a corner with that sales philosophy and it will be hard for them to escape. Even by some of the posts here ("What? 100.00 for an iPhone on AT&T is real cheap!"), it's pretty clear Apple has no designs on emerging markets.

As Rene previously mentioned, this rumor has been around since 2007. I would think twice before entrusting my money to the putative "analysts" who tout these rumors year to year. Gene Munster anyone?

For example, with the current subsidized model that the US carriers offer, you don't even receive a discount on your monthly bill when you bring your own device or come to the end of your two year commitment. Where would this unsubsidized, sub $200 phone fit into the product lineup at ATT and VZW currently? What's the incentive to purchase it when you are paying the same monthly bill?

Also, India and China both have a rapidly expanding middle class. In fact, China's is nearly the size of the entire US population. Is it possible that carriers in India will adopt a subsidized model as the middle class expands?

Apple already make a cheap iPhone, it's called the iPhone 5. Although, it's only cheap in quality, it's very expensive to buy. Just sold mine, only lost $300. If the 5S?6 rattles like a baby toy as the iPhone 5 does I'm buying android next.

There is no need to change the screen from that used on the iPhone 5. Apple has already demonstrated that they can produce a fully functioning iOS device with that screen in the iPod Touch. The screen in a phone is usually the most expensive component. The iPod Touch can also do almost everything that an iPhone 5 can do, yet it retails at less than half the price of an equivalent iPhone 5.
It's about time that Apple's customers started asking some questions.

I'm not sure Apple needs to make a less-expensive iPhone any more than they needed to make a $199 iPad (mini).

I realize there are developing nations where a low-price device is probably needed, and that those areas are mostly dominated by RIM- and Nokia-developed devices, but those companies are in pretty awful shape, financially.

Apple doesn't necessarily play the low-profit game in any market. They develop a product at a certain price, they maybe refine it a bit, or re-shape it and sell it at a bit of a lower price (think Macbook Air 11", iPad Mini, iPod Nano, etc.). That's more the direction I see them going with a less-expensive iPhone.

Keep in mind Apple currently rakes in the majority of the profits in the mobile industry. I'd imagine they're pretty happy being in that position, with a somewhat healthy share of the overall smartphone market instead of trying to capture more market-share, but with lower earnings. Assuming we see a low-price iPhone introduced, I picture that device being positioned as a premium product, even as an entry-level smartphone.

Steve Jobs once called the iPod Touch "the iPhone without a contract". He was clearly promoting the device as a cheaper alternative to the iPhone within Apple's own range. The iPod Touch can do almost everything that an iPhone can do, except for GPS and making calls.
The current models share the same screens and of course run the same software.
A 64GB iPod Touch costs US$399, whilst the equivalent iPhone 5 costs US$849. Could someone please tell me exactly what it is that you get for that extra US$450 for the iPhone and why it is worth it over an iPod Touch.
Even when compared to a similar device from Apple, the iPhone is so clearly overpriced.

Supposedly Schiller said "Despite the popularity of cheap smartphones, this will never be the future of Apple’s products." But maybe what he meant was "... the future of Apple’s products outside the People's Republic of China."

Everyone knows that Apple wants to cut a deal with China Mobile. It's possible that the "cheap iPhone" rumors are for a future China Mobile variant of the iPhone. Lower cost to increase China market share, and not for export to any other country.

My thoughts on a "cheaper China Mobile-only iPhone" theory:

1. There would be zero gray market exports, zero cannibalization of "expensive" iPhone sales in other countries. Because China Mobile's network is a proprietary oddball variant of 3G. If a cheaper iPhone were built to only support that protocol, it wouldn't run anywhere else in the world. Zero gray market. So sorry, Western cheapskates.

2. Apple could add hundreds of millions of iOS / iTunes / iCloud users from China Mobile's user base. Handset market share is important right now, but over time Apple will need to transition to profiting from software services and content delivery. The more iOS / iTunes / iCloud ecosystem users, the better. Doing a special China Mobile "cheap iPhone" might be worth it just for the boost in ecosystem users.

3. Then again, how long will China Mobile continue to use a proprietary 3G network? If and when they decide to upgrade their network to 4G, what happens to all those cheap iPhones? And more importantly, what happens to those iCloud ecosystem users? How could Apple (and China Mobile) keep them in the loop? It's possible that Apple is waiting out China Mobile's "proprietary 3G phase" and working on a deal to get iPhone on their next-gen network.

4. What if the Chinese government insists on some security backdoors to be able to track users' locations and decrypt users' data and voice calls? And what if Apple doesn't want to allow that to happen? Is that a deal-breaker?

I presume you're American. The rules are different elsewhere. You've been able to buy off-contract iPhones almost since day 1 in Australia, and the on-contract phones are priced differently. Consumers in most other countries would see genuine savings from a less expensive iPhone.

I find the notion interesting for 2 reasons - 1) Apple's margins are huge (they do so by stomping the hell out of the little guy - just ask Foxconn), & 2) Apple is losing market share. They have room to make the move since they make so much $$$ on their products. Will they do it to keep investors & the board happy?

Also, on a side note, I remember hearing Jobs say there would never be a cheap iPhone when the first model was initially released. Of course, this was also the guy who said consumers would never by a 4.3" phone.

I think one of the key drivers behind any new iPhone models this year will be Apple looking to get rid of the 30-pin connector.

The only devices where that still exists are the older model iPhones. I'm sure Apple is looking to transition away from supporting that (eg, adapters) as quickly as possible. And whether that means just a re-designed chassis for the older phones, or completely new, but less-expensive phones, remains to be seen.

i think apple will drop the 4s to $400 off contract but obviously they will make it with 8Gb only, they cant make a iPhone cheaper than that because then people will buy this one more than the one with contract and that is not good for businesses lol.

" No one but people for whom price is the only important feature, the kind of customers who break companies and entire industries, if those companies and industries are foolish enough to cater to them, benefited from netbooks. " No offense but you sound absolutely foolish. Customers should never, ever bend to any will the manufacturers have. In fact it is 100 percent the total opposite. "Foolish enough to cater to them." Companies should. And without a doubt, but alas somehow in Apple culture the opposite is held as universal truth. If your company wants a portion of my hard-earned middle class paycheck, YOU entice ME, first and foremost with price point. Anyone and everyone here can call Samsung products cheaply made, plastic, bargain bin, and be right. Same is true for the none flagship Nokia phones, but look at there sales numbers. Americans want a deal, and we don't care what goes on behind the scenes that makes it so. If Apple wants to play ball on an increasingly Android field, make that iphone cost less and do more. You can legitimize it anyway you wish, but Apple can keep the "quality" they're renowned for, and reach those emerging markets that Android is going unchallenged in, by selling older model iphones at cost. With how much their other products are marked up, and their status as the world's most valuable company, they can afford it. Their incentive to do so, you ask? Well that all important ecosystem lock-in is a good one to me, as well as still making money on the App Market sales. Amazon seems to be doing just fine with that business model. And so does Google's fledgling success with their Nexus Program. Apple can swing it, with only minor ego-bruising of the Apple purist sect.

Rene, you can't follow the logic? It's pretty easy: Android does well in emerging markets because it sells older cheaper handsets there. That's why you'll see the average citizen in Mumbai with an Android running Froyo but you won't see a 3GS anywhere there.

Except the OP was claiming that price is the preeminent decision factor. Apple has clearly proven that, for many buyers in the market, there is a willingness to pay more for higher quality (perceived or real). In fact, Apple hasn't proven that. Many companies have.

Yes and no. They can easily market to both. They have a "standard" and a "pro" model for everyone of their products, except for the iphone. They can target the people like you and I, as well as those with less money to spend on luxury items, but still feel like a luxury customer. Apple's brand is still Apple's brand. Some people would still feel more comfortable about buying a Mac book rather than a Mac book Pro. And still money to pay their cost of living at the end of the month.

And yet Apple went from being on the verge of bankruptcy to the most valuable company in the world by rejecting this truism that the customer always knows what they want. Given the choice, especially as an investor, I'll take the Apple model over the Amazon one.

Then Apple already has your money, can that be safely said? If they're after the wallets that they don't currently have a hand in, they must do business in a way they have not previously. ie ipad mini.

But the stats say they are getting new business, so they don't need to cut their margins. That might change in the future, but there's no evidence for it yet (the cause of the recent talk of inventory cuts has yet to be determined). (I do think they will need to change, I'm just saying people are still lapping up Apple products.)

The problem isn't the price of the phone. I see migrant workers and their children using iPhones. The real problem is the lack of options and the relatively useless UI and functionality of iOS. Here is what I expect in 2013.

1) The iPhone will continue to be 4 inches. There is clearly a demand for such a phone.

2) There will be an iPhone "Maxi" as Rene calls it and it will measure 4.7 to 5.0 inches. Nobody wants a smaller iPhone or a cheaper iPhone with plastic parts. The real allure of iPhone is the quality of the handset and people want a big handset. If people are willing to pay $299 on contract for the Galaxy Note 2, they will pay $299 on contract for the iPhone Maxi with a sleek metal design.

3) Jony Ive will set into motion a sweeping UI change for iOS. It will get rid of the horror of skeuomorphism and its functionality will get closer to Android than ever before. Yes, you will still have to use the App Store, but everything on the iPhone will come to you. Notifications will be actionable, SMS will be reply-able anywhere you are, and the UI will probably look like a fusion of Metro, Android and iOS. This is probably the most important part of what Apple needs to do in order to stop losing customers to Android.

There's no evidence - other than one off anecdotal stories - of Apple losing customers to Android. While overall market share has shrunk in the smartphone and tablet spaces (but continued to climb in the PC space), those markets are growing overall. Apple has sold more of each iPhone than all the ones prior combined. That math makes it clear Apple continues to acquire new customers. People keep waiting / demanding that Apple play the market share game. It's not gonna happen.